Market Participants Recognise Rheinmetall AG's (ETR:RHM) Revenues Pushing Shares 28% Higher

Despite an already strong run, Rheinmetall AG (ETR:RHM) shares have been powering on, with a gain of 28% in the last thirty days. The last month tops off a massive increase of 198% in the last year.

Since its price has surged higher, you could be forgiven for thinking Rheinmetall is a stock to steer clear of with a price-to-sales ratios (or "P/S") of 7.2x, considering almost half the companies in Germany's Aerospace & Defense industry have P/S ratios below 3x. Although, it's not wise to just take the P/S at face value as there may be an explanation why it's so lofty.

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How Rheinmetall Has Been Performing

Recent revenue growth for Rheinmetall has been in line with the industry. Perhaps the market is expecting future revenue performance to improve, justifying the currently elevated P/S. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Keen to find out how analysts think Rheinmetall's future stacks up against the industry? In that case, our free report is a great place to start.

How Is Rheinmetall's Revenue Growth Trending?

Rheinmetall's P/S ratio would be typical for a company that's expected to deliver very strong growth, and importantly, perform much better than the industry.

If we review the last year of revenue growth, the company posted a terrific increase of 36%. Pleasingly, revenue has also lifted 72% in aggregate from three years ago, thanks to the last 12 months of growth. So we can start by confirming that the company has done a great job of growing revenue over that time.

Shifting to the future, estimates from the analysts covering the company suggest revenue should grow by 30% per year over the next three years. That's shaping up to be materially higher than the 25% each year growth forecast for the broader industry.

In light of this, it's understandable that Rheinmetall's P/S sits above the majority of other companies. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

The strong share price surge has lead to Rheinmetall's P/S soaring as well. Generally, our preference is to limit the use of the price-to-sales ratio to establishing what the market thinks about the overall health of a company.

We've established that Rheinmetall maintains its high P/S on the strength of its forecasted revenue growth being higher than the the rest of the Aerospace & Defense industry, as expected. It appears that shareholders are confident in the company's future revenues, which is propping up the P/S. Unless these conditions change, they will continue to provide strong support to the share price.

It's always necessary to consider the ever-present spectre of investment risk. We've identified 1 warning sign with Rheinmetall, and understanding should be part of your investment process.

It's important to make sure you look for a great company, not just the first idea you come across. So if growing profitability aligns with your idea of a great company, take a peek at this free list of interesting companies with strong recent earnings growth (and a low P/E).

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.